Demand for oil will fall this year at the fastest rate since 1982, the International Energy Agency has forecast.
The rich countries’ energy think-tank has again cut sharply its prediction for world oil demand this year, and now expects it to average 84.7m barrels per day, down 1m b/d from last year, because of the steep downturn in the world economy.
This year is expected to mark two successive years of falling demand for the first time since 1982-83.
Fuel demand has ”plummeted” in the US and is falling in many other countries, the IEA said. Even in China, one of the countries that powered the global growth in oil demand up to 2007, the rise in consumption is expected to slow sharply.
However, the IEA also warned that sharp production cuts from Opec, the oil producers’ cartel, would mean that by the end of the year there would need to be a ”substantial” draw-down in oil stocks, unless demand weakens even further, or supply from non-Opec countries turns out to be stronger than expected.
Opec cut its agreed production levels by 4.2m b/d in the second half of last year, and could well cut production again at its next meeting on March 15 in a bid to raise oil prices from this week’s levels below $40.
The IEA’s forecast for oil demand this year is 570,000 b/d lower than it predicted in January, reflecting the sharp deterioration in the assessment of the world economic outlook from the International Monetary Fund.
Forecasts for oil demand in the US are unchanged, as the IEA already expected a second year of decline in 2009 following a drop of more than 5 per cent to 19.5m b/d last year.
The sharpest revisions come to forecasts of demand in the European Union and Japan.
Demand is particularly weak in the industrial sector; consumption of naptha, used as a feedstock for manufacturing plastics and synthetic fibres, ”virtually collapsed” in Germany at the end of last year, and has fallen ”off a cliff” in Japan.
In China, total oil demand is still growing, but the rate of increase has slowed very sharply.
As demand for oil drops, the IEA warns that its estimates of oil supply capacity are also falling, as the financial crisis and the plunge in oil prices from the summer’s peak of over $147 per barrel force companies to delay or cancel planned investment in increasing or sustaining production.
That reduction in investment is already likely to have some effect on oil supply this year, the IEA thinks, but the greatest impact will not be felt for a few years.
In its next medium-term analysis of the oil market, due out in the summer, the IEA will analyse the effect of project delays on the outlook for supply over the next five years, looking ahead to the hoped-for recovery in the world economy.
When economic growth picks up, under-investment could lead to supply shortages and send prices soaring again.
As the IEA puts it: ”Ultimately, low prices sow the seeds of their own destruction.”
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